A taste of crowd funding

I made my first crowd funding investment. It’s a very small investment, but I’m quite excited. This post reports on research examining ‘How and why consumers turn into crowd-funding participants’.

Perhaps you are a seasoned investor. Perhaps you had a go (or several) at crowd funding, already. Not me.

I have been looking at this ‘phenomenon’ for sometime, from a distance – more as something that I was aware of, rather than something I was interested in. My interest grew, however, when my former classmate, Paulo Silva Pereira, decided to quit his job in a top management consultancy to launch a crowd funding services firm. Paulo is not a grey, conventional consultant. So, I am not surprised to see him embracing a new challenge. But, he is a sharp guy, too. So, I thought that if this phenomenon was worth his attention, it was worth mine and I set out to learn more about it.

While reading about this phenomenon, I came across thispaper in the Journal of Service Management. The paper analyses the crowd funding phenomenon from the perspective of funders, as well as the perspective of services firms. Though, in this post, I am considering the funders’ perspective part of the paper, only.

Andrea Ordanini and colleagues adopt the definition of crowd funding as the ‘collective effort by consumers who network and pool their money together, usually via the internet, in order to invest in and support efforts initiated by other people or organisations’ (page 443). That is, the authors consider crowd funders as consumers that became part of the creation process. The implication of this definition is that the funders / consumers will have very different motivations from traditional investors. That’s exactly what the authors set out to investigate.

They concluded that:
– Consumers who participate in crowd funding like engaging in innovative behaviour. They like to be first and to use highly interactive tools;
– In some cases (it depends on the type of initiative), funders identify strongly with the proponents of the project, and/or the projects proposed. The higher the level of identification, the earlier the funder will invest in the project.
– In some cases (where there is strong identification, as described above), funding the project becomes a mechanism to support a cause, to make it possible. These funders tend to make small, though potentially significant, investments.
– In the other cases (i.e., no identification), the main driver is the potential financial return on the investment. In these cases, we tend to see large investments.

Regardless of the motivation or the size of the investment, consumers’ / funders’ behaviour follows a consistent path, consisting of three distinct phases. The path looks like this:
– In an initial phase, there is a quick and significant flow of capital by those consumers with high levels of involvement with the proponents of the project, and/or the projects proposed.
– Then, investment slows down. Progress is achieved mainly by gaining visibility through word of mouth and information cascades. Failure to push through this stage is the main reason why crowd funding projects fail.
– Finally, the projects that survived the previous stage witness a moment of rapid investment growth. Investors in this stage are motivated by a desire to ‘be in’ and not to miss the investment deadline.

Implications for managersThe insights obtained by this study are extremely relevant for those seeking investment from the crowd – or, to turn customers into co-producers.

The first key implication is that, if consumers present different drivers, then we can segment them. And if we can segment customers, then we can develop relevant value propositions to maximise the likelihood of success. For segments with high identification, the propositions should be based on intrinsic motivators; for the others, on extrinsic ones.

The second key implication is that a project funding opportunity is just like any other product – it has a life cycle. Different stages of the product life cycle are known to attract different types of customers. The communications channels used, the message, etc needs to be adjusted to reflect that reality.

It must be noted that the research that I am describing here was based on a small-scale study. Plus, my post discusses only a part of the findings. You are strongly encouraged to read the paper carefully. The full reference is:
Andrea Ordanini, Lucia Miceli, Marta Pizzetti, A. Parasuraman, (2011),”Crowd-funding: transforming customers into investors through innovative service platforms”, Journal of Service Management, Vol. 22 Iss: 4 pp. 443 – 470.

My own investmentThe project that I am supporting is the publication of a book of poetry by Arjan Tupan – here. I met Arjan on Twitter and wrote this #FollowFriday recommendation. Arjan posts a new poem everyday here and, so, I was familiar with his work, already.

Even though there is a broad range of perks on offer for funders, clearly I am not in because of the financial reward of this investment. So, I must fall into the ‘identification’ segment – which makes sense: not only do I like the poems and would like others to read them, but I, too, like writing and dream of publishing two very specific books.

Even though I stand to make no financial gain, strangely it feels very different from a donation to charity. When I donate to charity, I feel happy with myself and move on. For instance, I don’t go back and check how successful the bid is. The opposite is happening with this ‘investment’. I have been keeping an eye on the (slow) progress and wondering how quickly Arjan can make the transition into stage 3 of his funding bid.

Have you joined a crowd funding initiative? What motivated / would motivate you to invest in a project – identification or financial gain?

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6 thoughts on “A taste of crowd funding”

Wow, that’s interesting. When I started my campaign, I was reading The Dragonfly Effect (highly recommended book), and it helped me very much in shaping the way I started out. This post, and the research behind it, is very interesting. I knew I had to look at the funders/customers perspective, but I’m not yet sure how. So maybe here’s a good start: what are the thing that would convince you (in general) to fund a project like this? The fact that you, Ana, have already put some of your reasons in this post, is very helpful!On a slightly different note, Kiva has always interested me as well. I recently made my first loan on there. It is crowd funding based on loans.In any case: Ana, thank you so much for the mention here again. It will be very helpful for me to reach that 3rd phase :).

great reference, thanks Ana!I also found Ordanini to be quite inspiring:”Crowdfunding firms are “network orchestrators”, they create the required environment, organization and enablers to allow for resource exchange and integration among all intervenients. The authors go further and extend the rationale to specify that crowdfunding companies orchestrate a certain type of network, where the customer/financier plays the central role and not the actual firm. Such firms have optional orchestration modes, where they are able to intermediate where previously there was no intermediation.”We live in a new world!

Hi Arjan, I suppose I really fall in the identity segment – I have been dreaming about writing a book for so long that I empathised with your project. Have you advertised your project among writers / would be writers? Maybe discussion forums?On a side note, I would never have funded it if I had not come across your work via Twitter.